What GDP & Housing Tell Us about the Economy


By Jonathan Scheid

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The widely anticipated revision to first quarter U.S. Gross Domestic Product (GDP) lived up to the expectation that things were worse than previously reported. The cold weather and west coast port issues that occurred in the first quarter were blamed for the lackluster 0.2% GDP growth in the initial estimate. The second estimate of first quarter GDP was released last Friday and GDP growth was revised down to -0.7%. The drop was expected since investors received information in early May that the trade deficit, a key component of GDP, was materially different than originally estimated.

Over the last few years, we’ve seen significant drops in first quarter GDP, which were mainly caused by weather-related factors (e.g., last year’s Polar Vortex contracted the economy by -2.1% in the first quarter). If you get the feeling that we know there is cold weather and snow in the winter and that it shouldn’t be impacting the data, you’re not alone. In the middle of May, the government organization responsible for calculating U.S. GDP, the Bureau of Economic Analysis, announced that it was changing the methodology it uses to calculate GDP.

While the current GDP calculation methodology has seasonality factors built in, they noticed some “residual seasonality” in the data that was partly to blame for the recurring, lower-than-expected first quarter readings. The Bureau of Economic Analysis plans to start using the revised methodology when second quarter GDP is released this summer. The methodology should smooth out the data so there are fewer surprises from nature.

Speaking of second quarter GDP, most economists don’t expect another negative quarter. Fortunately, most economic data points sprung back to expansion levels once the cold weather cleared out. According to the Atlanta Federal Reserve and their GDPNow model, which estimates GDP growth rates as new economic data becomes available, the economy is on track to grow 0.8% in the second quarter. While this is lower than what analysts are forecasting, it currently indicates economic expansion.

Another area where we are seeing expansion is in real estate. Home prices continued to rise and so did the level of new home and existing home sales. Last week the S&P/Case-Schiller 20-City Composite Home Price Index, which measures home prices in 20 major U.S. metropolitan areas, reported that home prices were up 5% from a year ago ending March 31, 2015 (there is a two-month delay in reporting home price information due to data availability and processing).

Also released last week was the new home sales report. It showed that new home sales increased 6.8% in April and were up over 26% from a year ago. This is encouraging progress since housing expansion has been a disappointment throughout the most recent economic recovery. Existing home sales are also showing progress as the level of sales activity versus a year ago is up 6.1%.

Despite the weak first quarter GDP report, the U.S. economy appears to be in good shape and on a path to continued expansion.

Coming Up:On Friday, investors get to see how many jobs the U.S. economy created in May. Analysts expect 220,000 new jobs and that the unemployment rate will remain at 5.4%.

The views and opinions contained herein are those of Bellatore Financial, Inc. and have been researched and analyzed by Jonathan Scheid, CFA, President & Chief Investment Officer.

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